As Air Canada soars, WestJet takes a predictable nosedive
In its zeal for growth, airline’s profits have dropped 22.8 per cent over past three years WestJet’s fractious labour relations haven’t helped its bottom line.
One of today’s most compelling business sagas is the reversal of fortunes at WestJet Airlines Ltd.
For most of its 22-year existence, the Calgary-based company has been one of the world’s few consistently successful major airlines.
But today’s WestJet appears to be on a flight path to mediocrity, or worse. In its most recent quarter, WestJet reported its first loss in 13 years.
Should WestJet investors, employees and customers be worried? In a word, yes. WestJet described its abysmal secondquarter performance as the result of a perfect storm of higher fuel costs, cancelled bookings due to a threatened pilots’ strike and weather disturbances.
But WestJet’s worsening financial performance pre-dates those conditions. WestJet’s profits have dropped 22.8 per cent over the past three years. In its zeal for growth, the airline has committed the basic business failing of allowing growth in costs during that time (up 17.1 per cent) to outpace growth in revenues (12.5 per cent).
And about that perfect storm: WestJet would not have suffered the loss of tens of millions of dollars’ worth of bookings this year due to a threatened pilots’ strike if its labour relations, once a model of harmony for the industry, were not so fractious.
And the fuel bill has been more punishing than need be due to WestJet’s rapid expansion of its aircraft fleet without sufficient additional revenues to offset a coincident recovery in the world oil price.
Working with the same industry conditions, WestJet’s archrival, Air Canada, is in the midst of a turnaround for the ages.
Air Canada now outperforms all of its North American major-airline peers on the key metric of revenue per employee, at $688,000 to WestJet’s $392,000.
AC has gone from barely breaking even three years ago to posting a robust $2-billion profit in 2017. Over the past five years, shares in Air Canada have soared in value by about 800 per cent.
WestJet stock has gone in the other direction. The stockmarket value of WestJet has plunged by about 45 per cent since its 2014 peak.
WestJet has strayed from an original business model that made it both financially successful and Canada’s favourite, most passenger-friendly major airline.
Recall that the old WestJet, like the Texas-based Southwest Airlines Co. it was modelled on, was a non-union carrier whose employee profit-sharing and folksy management kept unions at bay.
The old WestJet flew just one aircraft type, the industry workhorse Boeing 737. That saved enormous sums of money on training, maintenance and aircraft downtime.
The old WestJet was a strictly domestic carrier, save for a few vacation-package flights to relatively nearby sunspots in North America and the Caribbean. It offered just one product: Discount-fare, mediumhaul flights on routes carefully selected for their profitability.
And the old WestJet was distinctive. Proudly Western Canadian, it was determined to match its nationally beloved Alberta peer, Wardair, in exemplary treatment of employees and passengers, an airline where senior management helped clean the aircraft cabins.
In recent years, however, WestJet has been made over into an impersonal, multifunctional airline like Air Canada, but without AC’s immense financial resources and entrenched market position.
At today’s WestJet, many pilots are unionized. And union drives are underway with unhappy flight attendants and ground crews. During the eight-year tenure of CEO Gregg Saretsky, a period marked by rapid growth and diversification at WestJet, the airline lost touch with its employees.
Saretsky abruptly departed in March. But in May, WestJet was revealed to have asked selected passengers to spy not only on WestJet’s in-flight employees, but those of competing airlines. WestJet apologized “unreservedly” for the unseemly incident.
Today, industry experts say, what keeps flyers loyal to both AC and WestJet is their loyalty rewards programs, not their customer satisfaction levels. The latter are now indistinguishable. And the two airlines’ pricing regimes are effectively identical. WestJet, no longer a committed discounter, has raised its fares five times this year.
If passenger TLC is no longer a WestJet hallmark, discontented employees help explain why. Both WestJet and Air Canada face formal allegations of maltreatment of flight attendants — yet another indication the two carriers have become same-as airlines.
The new WestJet flies several aircraft types, including the Boeing 767, the Q400 turboprop and the Saab 340B. And WestJet will soon take delivery of the first of 20 Boeing 787-9 “Dreamliners” it has ordered.
Operating a Dreamliner, one of today’s most expensive commercial aircraft, is a statement that an airline has “arrived.” WestJet now wishes to be known as “a global airline.”
Few global airlines have avoided a spell in bankruptcy protection, including Air Canada. Other troubled carriers have been merged out of existence. They include a Wardair that was a victim of the same over-expansion with which WestJet is now flirting.
Finally, the WestJet brand has been diluted by the company’s confusing new variety of products.
The new WestJet operates short-haul, medium-haul, vacation-package, trans-ocean, premium-priced and deepdiscount flights (its new Swoop airline). A WestJet that once vowed not to fly east of Manitoba now flies to Europe. With its Dreamliners, WestJet hopes to serve Pacific and South American destinations, as well.
WestJet has not gained mastery of its new size and complexity. Last year, the company’s total operating costs surged past the $4-billion threshold, on a revenue base of just $3.9 billion.
WestJet began life as a repudiation of the hulking, passenger-insensitive Air Canada. WestJet is now set on matching its archrival in revenues and product diversity.
But Air Canada, one of the world’s dozen biggest airlines, with 2017 revenues of $13.3 billion, has the resources to defend its markets and finance expansion. WestJet’s profits of $284 million last year were just 14.2 per cent of Air Canada’s. And in revenue terms, a comparatively diminutive WestJet is essentially an overgrown regional carrier whose reach appears to exceed its grasp.
WestJet now operates about 170 aircraft, more than half the size of AC’s fleet of 300. But WestJet generates only 29 per cent of AC’s revenues – a warning signal Bay Street has so far ignored.
WestJet finally acknowledged last month that it is overstretched, announcing a campaign to cut an annual $200 million from the firm’s costs.
Distracted by its pell-mell growth ambitions, WestJet lost focus on its existing business — on controlling costs, on cosseting its passengers, on respecting its employees and offering a product that was something special in the skies.
In a nutshell, today’s WestJet appears to be running on hubris, not wise management.
The shame of it is that, while Canadian travelers still mourn the demise of Wardair, they would not miss the new WestJet. It has, after all, become an airline like the others.